Defined terms are a ubiquitous part of a contract and demand as much attention as the substantive clauses. They play a big role in making contracts easier to read and comprehend.
Sometimes we define every single definable word in the contract. Sometimes we miss out on the big ones.
Other times we easily define words which have plain and simple meaning. Or we struggle to come up with a proper definition of a term key to the contract, agonizing over every word and punctuation mark.
Maybe we put them right at the beginning of the contract just after the introductory clauses. Or perhaps we spread them all throughout the contract.
This article is my attempt to help you navigate through and find answers to the why, how and where questions related to defined terms in a contract.
The Big “Why” Question
The contract may contain references to people, articles or terms which are used several times throughout the draft. Writing out the whole meaning every time will make a contract difficult to navigate and cumbersome to read. Definitions reduce a phrase or a whole sentence into one word, which can be used repeatedly with ease.
Defined terms give clarity and a sense of definitiveness to a contract. They also remove ambiguity and make contracts easier to understand.
In addition, defined terms are a very important tool in the interpretation of a contract. If there is a dispute between the parties, the contract drafter will pour over the clause in dispute and use the definition of the key terms to better understand the meaning and intent of the clause.
The “How” Rules
Here are some general tips about how to properly draft defined terms.
1. Using means versus includes
While drafting a definition, you will either use means or includes to begin describing the definition.
If you want to give a restrictive meaning to a term, then use means. “If the definition gives the entire meaning of the defined term (in other words, if the definition if “full”) use means as the definitional verb.”[1]
If you want to give a wider meaning to a term, then use includes. Includes automatically means that the definition is not exhaustive, and it can include other things apart from what is mentioned.
2. Customize your Definitions
Most contract drafters have never drafted a definition from scratch. We pick from templates, or from the other side’s draft, or simply Google it. However, a good contract drafter will always customize defined terms to suit the needs of the contract at hand.
Here are some guidelines you can use.
- If the term is industry-specific, research into the various ways it can be defined.
- Discuss with your client or business team and take their help in understanding the context.
- Look at a minimum of five templates online to draft a comprehensive definition.
- Lastly, once you have a first cut ready, edit it ruthlessly by shortening the length, using punctuation judiciously, swiping out the grand words with simpler, plainer synonyms and making the whole language crisp, sweet and simple.
3. Define only if you use a term more than once (and other tips)
Here are some more quick tips to keep in mind for defined terms.
- Do not define a term which is not present in the contract. Whenever I receive a draft from the other side, I run a Cntrl + F search on the definitions and find several of them absent. Many times, a draft undergoes several rounds of negotiations and some of the defined terms get deleted. Sometimes, the draft is the result of a template where the defined terms are not required in the present context.
- Don’t define any term unnecessarily. If a term has a common English meaning, no need to define it. If a term is used only once or twice, no need to define it.
- Definitions should appear at the first instance of usage of the term. Use a defined term only after defining it in the contract. If a definition cannot be included on the first use for stylistic reasons, then use a cross-reference to help the reader find where the definition can be found.[2]
- If you choose to group all defined terms under one clause, then list them alphabetically. It’s easier to locate them when one is looking at a physical copy.
The Important “Where” Question
It is a usual practice to group all defined terms in the first section of the contract right after the introductory clauses. This placement serves two purposes:
- It keeps all the definitions in one place. You can refer to just one clause and find out all the defined terms.
- It gives a sense of the contract and its terms through the definitions right at the beginning.
At other times, especially for a smaller contract, the defined terms are spread across the contract, appearing whenever the need for a defined term arises. This has the benefit of:
- Giving the definition as you read along the contract, thereby adding a context.
- Defining only the phrases which need definition.
Rarely, the defined terms are located at the end of the contract. By the time you reach it, you would have read the whole contract and gotten a sense behind the whole of it, which can make it easier to appreciate and understand the definitions.
My personal favorite is the “define-as-you-go” method, since I find a separate definition clause cumbersome to refer to every time I come across a defined term. Usually, during a negotiation, parties tend to get stuck on this clause right at the start which stalls progress. I believe if one has the context of why that term is defined the way it is, it will be better understood.
So, pick and choose your method depending on the type of contract and what, according to you, will make the reading process simpler and clearer.
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For more best practices on defined terms, check out my other article on Definitions and Interpretations Clauses here.
[1] See A Manual of Style for Contract Drafting (MSCD) by Ken Adams, 6.37.
[2] But see MSCD 6.112-6.114 advising that cross-references should only be used when “a defined term is stranded in a far corner of the contract.”
